Cannabis Is Looking More Like a Defensive Category

Cannabis companies are finally feeling like this is their moment to shine.

Beleaguered cannabis stocks could become this year's darlings of defensive stocks. While hotels and restaurants have closed, the food chain got disrupted, auto sales dried up, cannabis sales are humming along. That isn't to say all the companies are operating in tip top shape, far from it, but many are feeling like their ship has come in.

After years of fronting huge cash investments, regulatory challenges, and delays on legislation and licensing, cannabis companies are finally feeling like this is their moment to shine. Getting deemed an essential service in many states was just the shot in the arm that dispensaries and producers needed.

Hearing that dispensaries are reporting solid growth in sales, the stocks have begun to respond. Since the April 20 buzz, cannabis stocks have taken a turn for the better. Some of the biggest movers have been Acreage Holdings (ACGRF), which has moved from $2.02 on April 20 to roughly $2.85 by April 28, an increase of approximately 29%. Tilt Holdings (TLLTF) has moved from 16 cents to 27 cents for the same time frame, a 68% increase. Greenlane Holdings (GNLN) has popped from $1.81 to $3.09 for a 70% return.

Jason Wilson, is the cannabis and banking expert at ETFMG, which houses the ETFMG Alternative Harvest ETF (MJ) , and believes it's an excellent time for growth and defensive minded investors to enter the cannabis space. "We certainly saw some stockpiling in cannabis in the early days of the pandemic as sales spiked," said Wilson. After the initial surge, sales slowed for a hot minute, but then resumed. "Post outbreak sales in certain Canadian provinces are up 80%+," he said, "Sales are spiking in the U.S. including California, Colorado, Nevada, Oregon and Washington."

Wilson isn't the only analyst to pick up the defensive buzz. Bank of America's cannabis analyst Christopher Carey said, "Our checks across North America were consistent: regardless of region, cannabis purchases have accelerated." And that, "While likely pantry loading, it's not unreasonable to think there will be some boost per capita consumption as people stay home longer." MKM Partners analyst Bill Kirk also stated, "The vice of choice when alone is cannabis. The vice of choice in large groups or with new people is alcohol. We believe any increased stay-at-home activity related to Covid-19 will accelerate the vice share shift away from alcohol toward cannabis."

Catalysts

The two predominant reasons people consume cannabis (outside of prescription patients) are for help with sleeping and anxiety. In this pandemic environment, those are two very real reasons to keep purchasing cannabis. Social media is filled with people attesting to increased alcohol consumption and cannabis is right there with it, albeit without the addiction characteristics.

One of the key characteristics of a defensive product is that during difficult financial times, people will continue to find the money for this particular purchase. Shoes can wait. People will make do with clothes. The car will get repaired instead of traded in for something new. But when it comes to cigarettes, booze and now marijuana, consumers will cut out something else in the budget to make sure they can buy these other items. The old saying is would you rather have money and no pot or pot and no money?

Another thing that bodes well for the cannabis industry is the tax potential. Right now, states are writing blank checks to citizens who have been devastated by the lockdown. Take New York. Over one million people have filed for unemployment benefits and billions have already been paid out. This despite the fact that many residents haven't even been able to complete their claims. The state received an "F" grade for its unfunded liabilities even before the crisis began. New York City has $62 billion to pay $249 billion in bills. Again, these statistics are before the crisis. If the governor looks at other states and the money they gain from taxing recreational marijuana, he is sure to consider it a quick fix.

Consider that in January, Illinois reaped $10 million in tax revenue. This means it is on track to surpass Governor Pritzker's estimates. Wilson said, "Illinois is doing $2 million a day in sales. That's significant tax revenue." Plus, Wilson noted the job benefits. "Even if everything opened up today, it won't open up quickly and some jobs, like in restaurants may be lost forever. If states push to quickly legalize marijuana, that also jump starts jobs. These jobs are in clean environments like grow facilities where people are already wearing full protection."

We certainly saw some stockpiling in the early days, and also required medically for patients who were worried about supply chain disruptions. Sales spiked. Saw an initial blip. In most states and Canada, dispensaries deemed essential services, intertwined in society.

Stock Price Lift

Wilson said the MJ ETF did see some redemptions in the first quarter, but he was equally surprised at how many assets the company retained. "Investors are sticking with the industry," he said. "Sales in 2020 are outpacing 2019 and stock prices are still at historic lows."

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At the time of publication, Debra Borchardt had no position in the securities mentioned.

That doesn't mean we'll move straight up over the summer, but we'll get plenty of virus, China, stimulus, cannabis, and unemployment chatter.

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